The latest market update from the World Gold Council reports that new interest in gold as a reserve asset is spiking this year. The report, which was published on Thursday, relayed that the demand for gold by central banks has increased 8% in the first six months of 2018, with a total of 193.3 tons of gold having been added to central bank reserves so far, compared to 178.6 tons during the same period the previous year.
This spike marks the sharpest increase and a three year high for the central banks’ demand for gold. The purchasing spree was led in large part by emerging market central banks with Russia, Turkey and Kazakhstan buying the most and accounting for 86% of central bank purchases in the first half of 2018. Interestingly, even the central bank of Mongolia made a purchase with Egypt buying gold for the first time in four decades. India, Indonesia, Thailand and the Philippines also re-entered the gold market after long stretches of keeping their distance.
The World Gold Council, in explaining the renewed surge of interest in gold from the emerging market central banks, attributed it to being part of a larger strategic move in line with the international monetary system shifting away from the U.S. dollar. In other words, the central banks are choosing to buy gold because the dollar is losing its place – or is perceived as losing its place – as the dominant international currency.
Most central banks, with Russia being the main exception, prefer to keep gold as part of a diversified portfolio of investments just as investors do. While inherent risks do exist, according to the Canadian Bullion Services which advises investors interested in buying gold in Canada, when gold is used as part of an overall investment strategy then it can serve as an effective way to balance other assets that may not be performing well.
While the central banks gold buying trend is catching everyone’s attention now, it actually began back in 2008 when the central banks started adding small amounts of gold to their reserves. Over time the buying accelerated, until it peaked this year. Whether the trend holds steady or beings to waiver remains to be seen.